Another year, another round of property cooling measures.
It wasn’t too long ago when Singapore saw its last round of measures aimed at cooling the real estate fervour.
Back in July 2018, the government raised the additional buyer’s stamp duty (ABSD) for second property for citizens from 7% to 12%.
It wasn’t sufficient to cool the buying frenzy, though.
Property prices have risen for the sixth consecutive quarter in the fourth quarter of 2021, prompting the authorities to act decisively.
In this round, the measures are harder-hitting, with ABSD rising to 17% for the second property, up from 12%.
For permanent residents, they need to fork out a quarter of the property’s value in taxes if they wish to purchase a second investment property.
It’s a headache for investors who are looking to park some money in physical properties.
Singapore REITs, however, offer a tantalising alternative for investors who are vexed by the latest government measures.
Let’s find out why.
A history of cooling measures
Since the end of the Global Financial Crisis back in 2009, the Singapore government has had a history of moderating the market with the rise in property prices.
Low interest rates and the ability to borrow to finance investment property purchases have pushed prices up to worrying levels.
The very first set of cooling measures was imposed in September 2009 with the removal of interest-only mortgage loans.
After that, there have been cooling measures implemented every year from 2010 to 2013.
A five-year gap came before the next set of measures in July 2018, and now we have witnessed the latest moves.
Suffice to say that such measures should continue as long as the government wishes to promote a “sustainable” increase in property prices and to ensure people borrow prudently.
Similar exposure with lower risks
REITs are attractive in that they offer similar exposure to properties but with much less risk.
First off, REITs own a diversified portfolio of properties across different sub-types and countries.
By owning units of a REIT, you instantly gain exposure to a whole range of investment properties that are already generating healthy rental income.
For instance, Frasers Logistics and Commercial Trust (SGX: BUOU) owns a portfolio of 103 industrial and commercial properties spread out over Singapore, Australia, Germany, the UK and the Netherlands.
This diversification is helpful as it means that regulations in any one country will have a limited impact on the REIT.
Another REIT with a diversified portfolio is Mapletree Logistics Trust (SGX: M44U), or MLT.
MLT has a portfolio of 163 properties in eight countries worth around S$10.8 billion as of 30 September 2021.
Affordable ownership of properties
The main issue faced by property investors is the large upfront capital commitment required for an investment property.
Although mortgage loans can be taken to finance the bulk of the purchase, an investor will still need to cough up a six-digit sum to place as a down payment for a piece of real estate.
In contrast, owning REITs is much more affordable as they are traded in units on a stock exchange.
With just a few hundred dollars, you can purchase units of a REIT that owns a diverse set of properties.
Not only can you gain exposure to a large set of properties with minimal outlay, but you also do not need to worry about taking out loans and the movement of interest rates.
An attractive flow of dividends
Probably the most compelling reason for owning REITs is that they are essentially cash-paying machines.
REITs are obligated to pay out at least 90% of their earnings as distributions to enjoy tax benefits.
This arrangement means that income-seeking investors can happily rely on their REIT ownership to help them generate a steady stream of passive income.
Many REITs pay out distributions half-yearly, while some, such as Suntec REIT (SGX: T82U) and Mapletree Industrial Trust (SGX: ME8U), pay quarterly distributions.
The owner of an investment property needs to expend time and effort to locate a tenant to enjoy the same flow of rental income.
On the way, he also has to deal with property agents, bankers and lawyers.
REITs employ an experienced manager and a team of staff to ensure rental is collected on time and that the buildings are maintained properly.
And if the property is vacant for any amount of time, the investor loses out on rental income but still has to service his mortgage.
REITs do not have such a problem as their occupancy levels are usually high and a vacant unit will not have a significant impact on the REIT’s overall distribution per unit.
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Disclaimer: Royston Yang owns shares of Suntec REIT, Mapletree Industrial Trust and Frasers Logistics & Commercial Trust.
